Weather Insurance / Derivatives in Taiwan

1. Weather Insurance / Derivatives in Taiwan Dr. Chi-Ming Peng WRMA 2005/3/7

2. Contents • Market status in Taiwan • Weather Risk in Taiwan • Weather market Development

3. Extreme Weather Risk in 2004 Hot Summer Hot Summer Cold Summer Flood High Temp High Temp Cold Summer Winter Hot Flood Typhoon Flood Drought 10 Typhoon Hot and humid Hurricane Ivan Hot Drought Winter Typhoon Strong SE flow Tsunami Flood Cyclone Snow In Jun-Jul Hot, Drought Flood

4. Living with Risk • 2004 WMO report: • People concern more about the Politics conflict, however, Natural Disaster is greater than that for 7-10 times. • Natural disaster increase 2-3 times than ever. • Meeting the global change by CO2. “The day after tomorrow” may not be a movie in the future. • Weather Risk Management should be considered for every business.

5. Weather Insurance / Derivatives in Taiwan • 2004/6 The first Weather Insurance was approved by Insurance Bureau. • Central Insurance was the first mover in weather insurance. • 2004/7 The first weather deal is Rain Check for Boating and traveling by Hotel. • 2004/8 Outdoor Activity • 2004/12 Golf Course • 2005/1 WRMA Asian co-chair Ono-san visit FSC making a presentation to introduce the WD in Japan. • 2005/1 ABN AMRO Taiwan got the approval of WD by BOMA . • Insurance Bureau are studying how to lose the law, encouraging local insurance company can do the service.

6. Taiwan Central Weather Bureau open the weather forecasting license to private sector in 2004/12

7. Weather Risk in Taiwan • Direct damage is 17B NT dollars per year. (0.33% of GNP) • Typhoon: 73% • Heavy Rain: 22% • Extreme Cold: 2% • Drought: 1% • Indirect Impact • Over 100B NT dollars per year • By typhoon vacation, rain, fog….

8. Drought vs. Flood 2001 Flood Mean 2002-2003 Drought

9. 1901-2003降雨時序 1950年代後：準週期振盪 Ref: 徐晃雄教授

10. 2002年與2001年的差值 Water content changed After 2001 2003年與2001年的差值

11. 2002年與2001年的差值 High Pressure intensity increase, convection decrease 2003年與2001年的差值

12. Precipitation Pattern • （1993，1994，2003） • Taiwan, South China and Japan • （1993，1994，2003） 澇（旱） 旱（澇） Ref: 徐晃雄教授

13. Typhoon Frequency 1961-2004/10

14. Typhoon Impact • Direct Impact: Damage • Typhoon “vacation” (before and after) to Economics • Water resources Nari（2001） Toji（2001）

15. Managing Natural Hazard Mitigation (Before) Government Forecasting Disaster Prevention Rescue Compensation Problem: Equity and Justice, Efficiency $$$$$

16. Managing Natural Hazard Mitigation (After) Government Forecasting Disaster Prevention Rescue Capital $ Compensation WI / WD Compensation $$ $$ $$

17. Who are affected in Taiwan? • Theme Park, Golf Course…… • Raining in Holiday, typhoon • Energy Sector • Temperature • Retails • Raining days, typhoon • Farm and Fish • Drought and Flood • Temperature

18. First Weather Insurance in Taiwan • Golf Course • Rain Check • Rainy days • Theme Park • Rain Check • Rainy days • Hotel & Resort • Rainy days

19. Raining day Impact vs. ?

20. The Definition of Insurance • 3 Elements: • Obligation • Occurrence of an Event • Insurable Interest • Underthe above definition, the weather derivatives can NOT be allowed and the weather derivatives may be identified as a kind ofGamble.

21. What’s the thinking of our Customers? • The premium is too high! It should be around 0.1%-1% to the payout. • Insurance company always want to earn our premium. If we got the money back from WI/WD, will you raise the premium next time? • The spirit of Weather Risk Management will be confused by using the insurance product in Chinese/Taiwanese society. • The more stable and mature customer, the more they want about weather derivatives.

22. Regulation • Insurance Law：No derivatives, quasi WD possible but constraint by relevant authority • Futures Trading Law：loose regulation but low volume • Banking Law：WD Yes, but constraint by relevant authority • Securities Law：Some restriction and constraint by relevant authority

23. Educating the Market • Everyone know the “weather economics”, but little pay money for risk transfer. • Status of the enterprise (Active/Conservative) • Quantifying the risk and weather • 10-20% fluctuation of the Revenue by weather is important or not? • Hedging the risk by themselves. • Weather Risk Management is not only “Insurance” • Premium is too high compared to traditional insurance • Derivatives is better to promote than insurance

24. How we educating the Market? • Newspapers: more than 20 reports about the idea of Weather Risk Management. • Magazine: Detail introduction • TV stations: >10 TV stations • Broadcast Radio Station: • Radio program introducing weather risk management every week.

25. Weather Market Potential • 10-20 billion Taiwan dollars per year • Probably 10% of Japan • Energy Sector (Electrics) owned by government, liberalization is quite important in the recent year. • 2005-2006 will be a blooming year for weather Insurance/derivatives in Taiwan.

26. Weather Market in China • Weather Risk (damage) is 90B RMB in 2004. • Private weather information sector is still prohibited under the meteorological law. • Chinese version of “Weather Risk Management” text book was introduced. • Insurance, securities and bank are studying the weather insurance/derivatives.

27. Weather Data in China • Moving weather observation site • In KonDong province, 54 sites (accounting 70% of the 86 sites) were moved or destroyed due to the new construction. • Historical data might be unstable for some station. • Artificial Rain • Every weather department has their responsibility to make more rain. • What is the “true” weather/climate ?

28. Dr. Chi-Ming Peng pengcm@mail2000.com.tw 886-2-66389920

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